Susquehanna: Taper Fears Could Drag Revenue at BEN, Legg Mason

By Johanna Bennett

Taper fears continue to chase investors away from fixed income. That weakness in the bond market will take a toll on revenues generated by asset managers Legg Mason (LM) and Franklin Resources (BEN).

That’s the warning from Susquehanna Financial Group analyst Doug Sipkin in a note published today citing the $5.3 billion chased out of bond funds this week by renewed taper fears and rising interest rates.

Now at 2.82%, the yield on the 10-year Treasury hit a new high for the year or 2.92% yesterday. And economists at Deutsch Bank see it climbing above 3%. Rising interest rates have investors exiting lower-yield investments.

Legg Mason derives 39% of its net revenue from fees generated managing fixed-income investments. Franklin depends on fixed-income assets for an even bigger slice of its topline. But Sipkin sees fixed-income AUM at both firms falling this quarter – an average of 4% to 5% at Legg Mason and 4% at Franklin.

Citing weak flow trends and a balance sheet restricted by stock repurchase activity, Sipkin rates Legg Mason at Negative and sees the stock falling 30% to $23 a share. Yet he rates Franklin at Positive due to its product breadth, robust balance sheet and consistent payout ratios, predicting that the stock could reach $58 in the next 12 months. He writes:

…while both are vulnerable to sustained domestic and global bond weakness, we remain comfortable with BEN considering strength in hybrid flows, resiliency of international equity markets and a discount valuations. However, a recovery in global equity/debt markets is likely needed to re-energize shares.

At $47.15, Franklin’s share price has risen roughly 5% since late June, but still sits almost 17% below the 52-week high of $56.54 it hit in May.

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